Partnerships Once Inhibited Self-Dealing

By Richard E. Sylla, Henry Kaufman Professor of the History of Financial Institutions and Markets

On Wall Street, and generally in the financial industry, moral and ethical behavior has another name, fiduciary responsibility.

Self-interest — greed, if you like — did not arrive at Goldman Sachs around the time Greg Smith joined the firm in 2001. What had changed shortly before Smith signed on was that Goldman in 1999 had switched from being a partnership to a corporation. Goldman was the last of the major Wall Street investment banks to do so, which perhaps led it to try to make up for lost time.

On Wall Street, and generally in the financial industry, moral and ethical behavior has another name, fiduciary responsibility. In an investment banking partnership, fiduciary responsibility meant putting the interests of clients first, thereby earning their trust and confidence. Earning that trust was both the short- and long-term goal in building the bank’s business. A young banker such as Smith would hope to learn the ropes from the bank’s seasoned partners, absorb their ethical standards, build a career, and one day become a partner. Partners were cautious in taking risks because their own money, all of it, was on the line.